Britain's Tesco Plans Big Footprint in L.A. Market

The grocery giant leases a Glassell Park store about double the size that analysts expected.

British grocery giant Tesco plans to take over a shuttered Albertsons market in Glassell Park, an indication that it intends to build bigger stores than first expected.

The 32,500-square-foot location will be among the first of a group that the world's third-largest retailer will open on the West Coast next year.

"It is a strategy of developing local scale. They want to build enough market share to matter," said Darrell Rigby, who heads the global retail practice of consultant Bain & Co. in Boston.

Tesco said this month that it would invest about $470 million to enter the West Coast with a "new format ... designed for the American market."

Tesco is expected to open about 150 stores in Southern California and the Las Vegas and Phoenix areas. It has set up its U.S. headquarters in El Segundo and has purchased an 88.4-acre site along Interstate 215 south of Riverside for a distribution center to service those regions.

Tesco would not discuss its plans for the Glassell Park store, which is about double the size of what retail analysts previously expected.

The company has said that its U.S. stores would be based on its Express format in Britain, suggesting to analysts that they would be about the size of a typical Trader Joe's grocery. Like that Monrovia-based chain, Tesco Express sells fresh produce, meat, packaged goods, prepared foods, wine and other beverages.

Whatever formats it launches, Tesco said it was using extensive consumer research to tailor the stores to American tastes, including building a mock-up inside an unidentified warehouse in the region.

"We use a mock store to look at product mix, to take focus groups in to look around and to see what is appreciated by them and how customers react," said David Cox, a Tesco spokesman in England.

However, a person familiar with the company's plans said Tesco was working on what it calls a Fresh & Easy concept and could call its U.S. stores by that name. Those outlets will be designed for customers who want to run in and grab just a bag of groceries -- enough to make dinner that evening or fill a gap in their meal menu -- rather than make a full-scale shopping expedition.

The bigger stores will have a greater selection that approximates what other grocers sell. All of the stores are expected to do a brisk business in prepared foods.

Tesco, with about $80 billion in annual sales, already operates in 13 countries and has 300,000 employees.

Including the Glassell Park site, Tesco has signed just two leases for U.S. stores, but it has an active real estate team combing the region for locations.

Tesco also is likely to follow the playbook that has worked for the retailer in England and other countries.

"Wherever we put in an Express store we take a read of the local demographics and put in the right product mix," Cox said.

In upscale neighborhoods, the stores typically carry more premium products, including a "decent collection of wine, spirits and beer," while locations in working-class areas carry more basic offerings, Cox said.

Tesco's "traditional grocery shopping made simple" strategy is likely to take shoppers away from the main grocery chains rather than boutique and natural food stores such as Trader Joe's or Whole Foods Market Inc., retail consultant Rigby said.

"The biggest question for competitors is how many Tesco formats will show up here," Rigby said.

The size of the Glassell Park lease indicates that the British retailer most likely has a multifaceted approach to capturing a slice of the U.S. market, Rigby said.

Opening smaller convenience-style stores such as Express, as well as a larger concept closer to full-scale grocery stores, will help Tesco to quickly build scale and recoup its investment in the Riverside distribution center, regional sourcing and branding, Rigby said.

Already, Tesco is talking to suppliers about the product mix and has approached Bronco Wine Co. -- producer of the Charles Shaw, or "Two Buck Chuck," label -- about launching a value brand in its U.S. stores.

"Whether they can reach the volume that we need for that type of pricing is an issue," said Fred Franzia, chief executive of Bronco, which sells millions of cases of wine annually through Trader Joe's.

Franzia said Tesco would need to buy in large volumes from most of its U.S. suppliers if it was going to compete in California with retailers that run the gamut from large supermarket chains to Wal-Mart Stores Inc. Supercenters and niche players such as Trader Joe's.

With a consolidation continuing among the major supermarket chains, Tesco should have no problem finding store sites, said Matthew Heslin, whose Newport Beach-based Heslin Holdings Inc. owns the Glassell Park building with Retail Holdings of San Diego.

"There seems to be a continuous supply of these types of sites as stores close," said Heslin, a former Smart & Final Inc. real estate executive.

Both Albertsons Inc. and Kroger Co.'s Ralphs chain have closed supermarkets in the Glassell Park neighborhood, leaving the community with one independent grocer and a smattering of small convenience stores.

"This has forced us to shop outside of our local area," said George Brauckman, president of the Glassell Park Improvement Assn.

If Tesco "is clean and has fresh food and produce, it will do very well," Brauckman said. "People will like the idea that Glassell Park is the location for this new venture."